HSBC has warned it could take years to finally settle a lawsuit over the Bernard Madoff Ponzi scheme, as the bank’s profits fell 14% after it took a $1.1bn (£830m) hit on the 2009 scandal.
The London-headquartered bank’s finance chief issued the warning as the provision for the case dragged on HSBC profits, offsetting a jump in income in the three months to the end of September.
HSBC has so far taken a $1.1bn provision to cover a lawsuit by investors who lost money in the largest Ponzi scheme in history.
Madoff admitted in 2009 to defrauding thousands of investors of about $65bn and was jailed for 150 years. He died in prison in 2021. HSBC provided administrative services to a number of funds that had assets invested with Madoff Securities.
The hit to HSBC comes after a court turned down the bank’s efforts to appeal over the case against its Luxembourg arm.
The chief financial officer, Pam Kaur, told journalists that the figure could vary and that a settlement over the case could take years. “This is a complex case,” she said on Tuesday. “This will take a period of time to go through. It could take months, it could take years, as you can imagine this case itself has taken a very long time to come through.”
Kaur said the $1.1bn figure was “not some average number we have come up with. We have come up with the best judgment based upon advice from our accountants, our internal counsel, our external legal counsel. Of course, there could be some variation around that number.”
HSBC said it planned to file a further case in the Luxembourg court of appeal and if that fails it will dispute the final amount in later proceedings.
The latest provision contributed to a 14% drop in pre-tax profits for HSBC, which fell to $7.3bn for the three months to 30 September. That was down from $8.5bn during the equivalent period last year.
The lender said the Madoff provision fed into a 24% jump in operating costs to $10bn. However, that figure also included restructuring costs that covered severance for bankers let go as part of a shake-up under the chief executive, Georges Elhedery, announced last year.
HSBC also put aside another $1bn to deal with the ripple effects of China and Hong Kong’s real estate downturn, which has hit the banking sector with a rise in bad debts linked to the crash in property prices.
Together, the provisions offset a 15% rise in net interest income to $8.8bn, and a 12% jump in net fee income to $3.5bn.
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Kaur also commented on HSBC’s links to the private credit market, which has come under scrutiny after two US company bankruptcies and warnings from the International Monetary Fund and the Bank of England.
The Bank of England’s governor, Andrew Bailey, said last week that the recent failures had worrying echoes of the sub-prime mortgage crisis that kicked off the global financial crash of 2008. Meanwhile, the IMF warned that a downturn could have ripple effects across the financial system, given that banks were increasingly exposed to a largely unregulated private credit industry. There are concerns that a downturn could destabilise traditional banks that issue loans to the shadow banking sector.
HSBC’s own direct exposure to the private credit industry was small and in the “single-digit billions”, Kaur said, adding: “We are not a big player in this space at all.” Its rival Barclays revealed – and played down – its own £20bn exposure last week.
“What is very important in these situations is to consider the second- and third-order risks of other smaller banks or hedge funds that we may be dealing with, and that becomes a primary focus for us,” Kaur said. HSBC is “monitoring the situation very carefully”, she added.
Elhedery said in a statement released alongside the bank’s results: “We are becoming a simple, more agile, focused bank, built on our core strengths. The intent with which we are executing our strategy is reflected in our performance this quarter, despite taking legal provisions related to historical matters.
“We remain fully focused on helping our customers navigate new economic realities, putting their changing needs at the heart of everything we do.”
